Question

Calculating beta (show formula)
Given the following:
Rate of return on Company Z			16%
Market rate of return			12%
Risk free rate			4%
1. Calculate Company Z's beta
2. If Company Z's beta is 2.2, what would be the new required rate of return

Answer 1

RATE OF RETURN = Rf + beta* (Rm-Rf)

16% = 4% + beta* (12%-4%)

12% = beta*((8%)

beta = 12%/8% = 1.5

ANSWER 1 : beta = 1.5

NOW IF beta = 2.2

New Required Rate of Return = Rf + beta* (Rm-Rf)

New Required Rate of Return = 4% + 2.2* (12%-4%) = 21.60%

ANSWER 2 : 21.60% [Thumbs up please]